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9 posts from March 2016

March 30, 2016

The Effect of Exchange Rate Shocks on Domestic Prices



The Effect of Exchange Rate Shocks on Domestic Prices


Changes in exchange rates directly affect import prices. Since the beginning of 2014, the U.S. dollar has strengthened by 17 percent against the currencies of its major trading partners while import prices have fallen by 4 percent. The pass-through from exchange rates into import prices in the United States is estimated to be quite low, at around 30 percent, and this is often attributed to the fact that imports are mostly invoiced in U.S. dollars. In addition to this direct impact of exchange rates on import prices, there can also be an effect on domestic prices. Suppose that a stronger U.S. dollar means that cars imported from Japan will be cheaper for U.S. consumers. If domestic auto producers do not then reduce their U.S. prices they could lose market share. By how much do they adjust their prices? In this post, we draw on a new study—“International Shocks and Domestic Prices: How Large Are Strategic Complementarities?”—that uses micro-level data for Belgian firms to shed light on this question.

Continue reading "The Effect of Exchange Rate Shocks on Domestic Prices" »

Posted by Blog Author at 7:00 AM in International Economics | Permalink | Comments (1)

March 28, 2016

How the Fed Smoothed Quarter-End Volatility in the Fed Funds Market



Correction: In the original version of this post, the chart “Average Daily Fedwire Payments Are Higher at Quarter-End” contained incorrect data. The chart has now been updated. We regret the error.

How the Fed Smoothed Quarter-End Volatility in the Fed Funds Market

The federal funds market is an important source of short-term funding for U.S. banks. In this market, banks borrow reserves on an unsecured basis from other banks and from government-sponsored enterprises, typically overnight. Before the financial crisis, the Federal Reserve implemented monetary policy by targeting the overnight fed funds rate and then adjusting the supply of bank reserves every day to keep the rate close to the target. Before the crisis, reserves were generally in scarce supply, which periodically caused temporary spikes in the fed funds rate during times of high demand, typically at the end of each quarter. In this post, we show that the Fed actively responded to quarter-end volatility by injecting reserves into the banking system around these dates.


Continue reading "How the Fed Smoothed Quarter-End Volatility in the Fed Funds Market" »

Posted by Blog Author at 7:00 AM in Fed Funds, Financial Markets, Monetary Policy | Permalink | Comments (0)

March 25, 2016

Happy Fifth Birthday, LSE!



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When we launched our research blog five years ago this week, we didn’t expect to set any internet traffic records while writing about economics. Still, we saw that a blog would be a good way to build familiarity with our research and policy analysis, and to share the expertise of our staff when it’s relevant to issues in the public eye. As I said back at the birth, our goal was to deliver “lively, clear, and analytically sound” posts and, in that, I think we have succeeded.

Continue reading "Happy Fifth Birthday, LSE!" »

Posted by Blog Author at 7:02 AM in DSGE, Macroecon | Permalink | Comments (0)

Upstate New York Job Growth: The Bad News Is that the Good News Was Wrong



Upstate New York Job Growth: The Bad News Is that the Good News Was Wrong

In 2015, upstate New York looked to be having its strongest job growth in years. Employment was estimated to be growing at around one percent—below the national pace, but twice the region’s trend growth rate since the end of the Great Recession. Buffalo, in particular, looked to be gaining significant numbers of construction and manufacturing jobs for the first time in decades, pushing it to its highest job growth since the late 1990s. Unfortunately, the good news was wrong. Annual benchmark revisions to New York State’s employment data released in early March cut upstate’s growth rate in half, indicating that the pickup in the pace of the region’s job growth never really happened.

Continue reading "Upstate New York Job Growth: The Bad News Is that the Good News Was Wrong" »

Posted by Blog Author at 7:00 AM in Employment, New York, Regional Analysis | Permalink | Comments (0)

March 23, 2016

Is Bitcoin Really Frictionless?



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Bitcoin is the most popular virtual currency yet developed. Proponents assert that bitcoin can remove frictions involved in payment and settlement systems by eliminating the need for the financial intermediaries that exist in traditional currencies. In this blog post, we show that while bitcoin transfers themselves are relatively frictionless for the user, there are significant frictions when bitcoins trade in exchange markets resulting in meaningful and persistent price differences across bitcoin exchanges. These exchange-related frictions reduce the incentive of market participants to use bitcoin as a payments alternative.

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Posted by Blog Author at 7:00 AM in Exchange Rates, Financial Markets | Permalink | Comments (1)

March 21, 2016

What Tracks Commodity Prices?



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Various news reports have asserted that the slowdown in China was a key factor driving down commodity prices in 2015. It is true that China’s growth eased last year and, owing to its manufacturing-intensive economy, that slackening could reasonably have had repercussions for commodity prices. Still, growth in Japan and Europe accelerated in 2015, with the net result that global growth was fairly steady last year, casting doubt on the China slowdown explanation. An alternative story relies on the strong correlation between the dollar and commodity prices over time. A simple regression shows that both global growth and the dollar track commodity prices, and in this framework, it is the rise of the dollar that captures last year’s drop in commodity prices. Thus a forecast of stable global growth and a relatively unchanged dollar suggests little change in commodity prices in 2016.

Continue reading "What Tracks Commodity Prices? " »

Posted by Blog Author at 7:00 AM in Forecasting, International Economics, Macroecon | Permalink | Comments (3)

March 07, 2016

Banking Deserts, Branch Closings, and Soft Information



Editors’ Note: The original version of this post slightly overestimated the fraction of people of all types (low income, minority, etc.) who live in banking deserts. This version reports the correct figures. None of the substantive conclusions were affected. (Updated July 12, 2016)

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U.S. banks have shuttered nearly 5,000 branches since the financial crisis, raising concerns that more low-income and minority neighborhoods may be devolving into “banking deserts” with inadequate, or no, mainstream financial services. We investigate this issue and also ask whether such neighborhoods are particularly exposed to branch closings—a development that, according to recent research, could reduce credit access, even with other branches present, by destroying “soft” information about borrowers that influences lenders’ credit decisions. Our findings are mixed, suggesting that further study of these concerns is warranted.

Continue reading "Banking Deserts, Branch Closings, and Soft Information " »

Posted by Blog Author at 7:00 AM in Banks, Crisis, Financial Institutions, Household Finance, Regulation | Permalink | Comments (0)

March 04, 2016

Hey, Economist! How Well Do We Weather Snowstorms?



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Editors’ note: With this post, Liberty Street Economics launches an occasional series featuring interviews with our economists about their areas of expertise or recent research. In today’s post, Trevor Delaney, one of our publications editors, caught up with Jason Bram, a research officer in our Regional Analysis division to discuss how snowstorms do, or don’t, affect New York City’s economy. With a bit of snow expected here this weekend, the timing is auspicious.

Continue reading "Hey, Economist! How Well Do We Weather Snowstorms?" »

Posted by Blog Author at 7:00 AM in Hey, Economist!, Regional Analysis | Permalink | Comments (2)

March 02, 2016

Would Monetary Tightening Increase Bank Wholesale Funding?



The recent financial crisis clearly revealed that the reliance of banks on short-term wholesale funding critically increased their funding liquidity risks; during market disruptions, it becomes more likely that banks will be unable to roll over those funds and will hence be forced to fire-sell illiquid assets and possibly contract lending. To limit such risk, the Basel Committee on Banking Supervision (BCBS) has introduced new liquidity regulations such as the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) to prevent excessive reliance on runnable funding in the banking sector. But what forces contributed to the banking sector’s reliance upon wholesale funding and how will the new liquidity regulations interact with monetary policy? Drawing on our recent Staff Report, we argue that monetary tightening by central banks, perhaps intended to contain credit booms, can lead banks to increase their reliance upon wholesale funding and contribute to systemic imbalances. Importantly, we explain how the new liquidity regulations adopted since the crisis would help mitigate any such increase in systemic risk.

Continue reading "Would Monetary Tightening Increase Bank Wholesale Funding? " »

Posted by Blog Author at 7:00 AM | Permalink | Comments (0)

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